Netflix delays crackdown on account sharing after ‘cancellation reaction’

Netflix has pushed back the planned U.S. rollout of its closely watched bid to crack down on account sharing, a move it says will weigh on memberships and revenue as it seeks to improve the quality of the new service.

The streaming video company estimated revenue of $8.24 billion in the second quarter, less than the $8.47 billion expected by Wall Street analysts, according to a press release on Tuesday. Its shares initially fell more than 10% in after-hours trading before bouncing back and recouping those losses.

Netflix said in a letter to shareholders that the ‘paid sharing’ service – which allows customers to share their account with people outside their household for a fee – led to a ‘cancellation reaction’ after it launched on some markets, including Canada and Spain.

This initially hurt “short-term” growth in its membership, but Netflix said the crackdown eventually led to increased subscriptions and revenue when borrowers activated their own accounts. In Canada, the paying subscriber base was now higher than before the launch of the “paid sharing service”, the company said.

Netflix said around 100 million households “share” their accounts globally. According to Morgan Stanley estimates, Netflix could potentially convert 20-30% of these into paying members.

“This account sharing initiative is aimed at creating a broader base of potential members,” co-CEO Ted Sarandos said in a video presentation on Tuesday. “That’s why we focused so much on execution.”

After Netflix shocked investors last April by revealing that it had lost subscribers for the first time in a decade, it announced two new revenue-boosting programs: cracking down on password sharing and launching… an ad-supported service, which debuted in November.

It said it was delaying the broader launch of paid sharing in the U.S. and three other markets from Q1 to Q2, which would shift “some of the growth in memberships and revenue earnings” from Q2 to Q2. third. It could also lead to a “modest” reduction in engagement with Netflix’s service in the short term, he said, although he expected that to recover over time.

Despite the rollout delays, Netflix said it was confident it could meet its full-year goals, adding it was “satisfied” with recent paid-sharing launches.

Spencer Neumann, Netflix’s chief financial officer, said new ad-supported services were still in “start-up mode”.

But the company said it hasn’t seen many customers abandon their high-priced subscriptions in favor of cheaper ad-supported options, as some feared.

Sarandos warned that a potential strike by Hollywood writers next month would be “devastating” for the creative community and viewers, but added that Netflix had a strong base of international content that would help it weather a strike. “We really don’t want a strike to happen,” Sarandos said. “We are at the (negotiation) table”.

Netflix added 1.7 million subscribers worldwide in the first quarter, below Wall Street’s forecast of 2.3 million. Its revenue rose 3.7% to $8.16 billion, but its net income fell from $1.6 billion to $1.3 billion. Earnings of $2.88 per share were above investor expectations.

The company also announced that it would end its DVD rental program in September after 25 years, marking the end of a service that was central to Netflix’s business model when it was created.

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